A tepid response from shoppers to the iPhone 16 has not dented investors' enthusiasm for Apple Inc. shares, which enjoyed a multi-month rally in anticipation of the launch.
The model went on sale this month, though the highly touted artificial-intelligence tools won't arrive as software updates until October. Data on pre-orders and lead times have been cautious, analysts say, suggesting the most optimistic expectations for an upgrade cycle may be out of reach at the moment.
Even so, Apple stock has managed to dodge the volatility its Big Tech peers have experienced recently, and much of Wall Street still expects the AI iPhones to trigger an acceleration in growth.
Jack Ablin, chief investment officer at Cresset Wealth Advisors, is among those betting the upgrade cycle will materialize eventually. While acknowledging the iPhone release was less strong than hoped, "it won't even be a speed bump in the company's long-term progress," he reckons.
"Apple has so many cylinders that support the stock, and if one of them trips up in the short term, others can keep going," Ablin said. "It is a high-quality company with predictable earnings and massive cash flow, and even if it's a little expensive, it still scans as a safe haven against a macro backdrop that has some question marks."
That confidence has lifted Apple shares nearly 40% off their April lows, adding $911 billion to the company's market capitalization. The stock price is just 3% under a record high hit in July, while other megacaps such as Microsoft Corp., Nvidia Corp., and Alphabet Inc., are further away from their all-time peaks.
The view of Apple as a relative haven among equities stems from its track record of steady earnings growth, even during rockier economic periods. It repurchases stock regularly and in large amounts -- a buyback announced in May was the largest ever in the United States. Finally, it hasn't engaged in the kind of heavy AI-related capex other megacaps have undertaken; such spending has been increasingly questioned by investors.
Apple screens favorably in terms of quality, profitability, buybacks and momentum, data compiled by Bloomberg shows. Meanwhile, the CBOE Apple VIX, which tracks a market estimate of future volatility for the stock, has been trending lower and is under its 10-year average.
The flip side is that it scores poorly on value and growth. Apple trades near 31 times estimated earnings, more than 50% above its 10-year average, and notably above the Nasdaq 100 Index's multiple of 26. Its price-to-sales ratio recently hit the highest since at least 2000.
The growth issue is particularly significant, given the upgrade cycle isn't playing out yet. Apple's revenue has dropped in five of the past seven quarters, and analysts predict it will rise just 1.8% in its 2024 fiscal year, before accelerating to 7.9% the following year.
All that suggests the stock's rally could be vulnerable if the hoped-for upgrade cycle doesn't come through. For such reasons, just two-thirds of analysts recommend buying Apple shares, compared with ratios near or above 90% for Microsoft, Nvidia, Amazon and Meta Platforms Inc.
As for the iPhone 16, multiple analysts have flagged early data points, including on preorders and lead times, as signs of lower demand.
"In totality, these data points are more negative than positive for the iPhone 16 cycle, though they still have little predictive power over the full cycle," Morgan Stanley analysts wrote.
Bloomberg Intelligence, citing a survey it conducted, as well as daily tracking of iPhone lead times, expects "roughly 230 million iPhone units will be sold in fiscal 2025, for growth of 3%," below a prior expectation of 5% growth. As a result, analyst Anurag Rana wrote, revenue gains may be 200 basis points below consensus.
For Ed Egilinsky, managing director at Direxion Funds, it's worth waiting to see how demand for the new handset plays out, especially when the AI tools are added.
"Apple certainly has a great business, and it is one of the premier stocks in the market, but it is priced richly given its growth prospects," he said. "People need to be aware that just because it's a bellwether that has been viewed as defensive, it can still face downside."
Information for this article was contributed by Subrat Patnaik of Bloomberg News.